Simplified quote sharing calculation

ABSTRACT

Presented is a method for calculating and distributing quoting share revenue to exchange members that contribute quote data to market data feeds. First, the method reads in trading data chronologically for a particular day. Using an object oriented framework, the method divides the symbols and orders into groups of objects to facilitate the tracking of the total price, quantity, and seconds displayed for each symbol. The timestamp of each message is read and the seconds field is parsed ignoring fractional seconds. Credits are awarded for each second the quote is displayed at the National Best Bid/Offer (“NBBO”) by multiplying the price, quantity, and elapsed whole seconds. These quote credits are stored by the system for each member and symbol. Members are eligible to earn quote credits on either the bid or the offer or both at the same time.

FIELD OF INVENTION

The present invention relates to computer applications for financialdata processing. More particularly, this invention relates to anautomated method of tracking and attributing member quoting activity forthe purpose of equitably and efficiently distributing quote sharerevenue among market participants.

BACKGROUND

Currently, there are three networks responsible for generating anddisseminating consolidated market data to the public under the jointself regulated organizations (“SRO”) plans and the Exchange Act Rules.The three networks are the NYSE, AMEX, and NASDAQ (“the networks”). Thenetworks collect revenues from public subscribers to their market datafeeds. The networks are required by the network plans and the Securitiesand Exchange Commission (“SEC”) to redistribute the subscriber revenueto any SRO that contributed quote and trade data to these market datafeeds after deducting certain costs including the cost of administratingthe redistribution. The existing revenue distribution formulas amongSROs are based solely on trading activity of each SRO. Currently,revenue is not distributed based on quotes. However, when the SECimplements Regulation NMS (“Reg NMS”) the existing formulas will nolonger be used.

Under Reg NMS, the plan formulas will be modified to include three newcomponents: Security Income Allocation, Trading Share, and QuotingShare. The Security Income allocation component involves theappropriation and aggregation of revenue across all symbols for each SRObased on the square root of the dollar volume of all trades occurringduring the year. The revenues for each symbol will then be split betweenTrading Share and Quoting Share. The Trading share portion will be 50%of the revenue in a specific security. The Quoting share will accountfor the other 50% of the revenue.

The formula, adopted by Reg NMS, for allocating quote share is thedollar amount determined by multiplying the quote share of the securityincome allocation for the specified symbol by the SRO's quote rating ina given security. An SRO's quote rating is determined by dividing thenumber of quote credits earned by the SRO by the total number of quotecredits earned in the symbol by all SROs. Reg NMS states that an SRO isentitled to a quote credit (QC) only when a price is displayed at theNational Best Bid Offer (“NBBO”) for at least one full second. The QCformula derived by Reg NMS is the following:QC=# of seconds price shows at NBBO×quantity×price

One method for allocating subscriber revenue among the SROs under RegNMS was developed by the Tee Williams Group. This method is designed toassign Quote Credits accurately when quotes are being posted and removedon the scale of milliseconds compared with the one-second intervalspecified by Reg NMS. This method was also developed to overcomedistortion of the true NBBO by participants that enter “flickeringquotes,” that is, quotes that are posted for short intervals. Suchflickering quotes have the effect of preventing other participants frombeing at the NBBO for a full second but do not contribute to pricediscovery. The Tee Williams method was also designed to deal with thefact that the quantity of quotes is constantly fluctuating on each ofthe network exchanges. The Tee Williams method overcomes these problemsusing a complex algorithm, which is described in Greenbaum, Lee andWilliams, R. Tee; CTA/UTP Revenue Allocation Functional RequirementSpecification, Nov. 16, 2006, Ver. 3.1.

The Tee Williams method is used by the Networks to distribute subscriberrevenue among SROs. It is impractical for individual SROs to use thismethod to distribute that revenue among individual market participants.Because of the enormous amount of data required to perform the TeeWilliams calculation and the complexity of the algorithm, it wouldrequire a large team of developers and testers to implement a similarsystem at the level of an individual exchange. Moreover, there is noguarantee that the resulting calculation would accurately track the samedistribution within an individual exchange as the Tee Williams methoddoes among SROs because of timing differences between market data feeds.

The Tee Williams method allocates market data revenue among a relativelysmall number of SROs. There is a need for a system where SROs candistribute the market data revenue they receive from the networks totheir own members who place quotations and orders on their markets. Byproviding this revenue to their members, an SRO can incentivize thosemembers to place more and larger orders on their markets. Distributingmarket data revenue also gives an SRO a competitive advantage over otherSROs that do not distribute this revenue. But allocating market datarevenue using the Tee Williams method presents a problem for SROs. TheTee Williams method is computationally intensive and requires dedicatedresources and personnel to administer and maintain the necessaryhardware and software. It is workable where total amount of revenue todistribute is relatively large compared with the costs to operate thesystem. What is required is a method and system to calculate memberQuote Credits that remains true to the formula required under Reg NMS,that minimizes the impact of flickering quotes and rapid changes inquotation size that is simpler to code and maintain, more easilyimplemented and computationally more efficient than prior art methods.

SUMMARY OF INVENTION

The present invention is directed to a method and system for allocatingmarket data revenue among a plurality of entities that provide marketquotes. It is an object of the invention to provide a method and systemwherein market data revenue is allocated only on the basis of quotesthat provide price discovery and wherein “flickering quotes” are notused to allocate that revenue. In is a further object of the inventionto equitably and efficiently allocate quote revenue among marketparticipants in a manner that approximates revenue allocation by theNetworks. It is a further object of the invention to provide a quoterevenue allocation method and system that fairly allocates market datarevenue at lower cost and in a more computationally efficient mannerthan prior art methods. It is a further object of the invention toprovide an efficient method of tracking and attributing quote credits toall members of an SRO responsible for the SRO earning quote revenuesfrom the Networks while avoiding the cost and complexity to build andmaintain a system using prior art methods.

According to an aspect of the invention, the system first divides aday's worth of trading activity into intervals considered to besufficient to provide price discovery, for example, one secondintervals. A shorter or longer time interval could be selected providedthe interval is sufficient to reject quotes too short-lived to fairlycontribute to price discovery. By dividing the data into such intervalsthe system effectively removes the impact of flickering quotations andfluctuating quote quantities from the equation. Any quotes that areadjusted or “flicker” for periods less than this interval will beignored by the calculation and any quantity adjustments caused by eithera quote modification or an execution that occurs during the intervalwill also be ignored by the system. The system then compares the priceand current quantity of the quotes provided by market participants ateach interval to the NBBO. If the quote was equal to the NBBO and wasdisplayed for one full second or more, then the QC is calculated and thequote credit will be assigned for that interval. If the quote isdisplayed for several intervals it will be eligible to earn credits ateach interval.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is a main algorithmic loop, executable on a computer, forprocessing market data and keeping track of quote credits according toan embodiment of the present invention.

FIG. 2 is an algorithm used for calculating credits according to anembodiment of the present invention.

FIGS. 3 a and 3 b illustrate examples of how a symbol object calculatescredits according to an embodiment of the present invention.

DETAILED DESCRIPTION

In a preferred embodiment, the invention is implemented in the C#programming language using object-oriented programming techniques, butcan be encoded in any other object-oriented programming language, ornon-object oriented programming language as will be appreciated by aperson of ordinary skill in the field of the invention. According to oneembodiment of the invention, market data is stored in a Market DataRepository (“MDR”). An MDR stores market data and re-plays data messageschronologically. Data may be stored and processed on a daily basis, forexample, after the close of a trading day. Alternatively, data may becollected over some other period of time and processed or else processedcontinuously as data messages are generated.

According to one embodiment of the invention, MDR data is accessed via aplug-in, which is a block of code contained within a library file thatsubscribes to the MDR. In a preferred embodiment, data is read from anMDR, but the invention is not limited to MDR data. Any other source ofmarket data could be used, such as a database. If an embodiment uses adatabase, then software with embedded database calls can be used toretrieve market data.

According to a preferred embodiment of the invention, the system definesan object class called “Symbol Processor.” A Symbol Processor object iscreated for each symbol in the current order book. The symbolcorresponds to a particular financial instrument, for example, a stock,an option contract, a currency, or the like. By way of illustration, thepreferred embodiments of the invention are described in terms of aparticular stock, for example, shares of IBM.

The Symbol Processor uses two hash tables, which include one table forbid orders and one table for ask orders for that symbol. The tables arehashed by price. The Symbol Processor also contains the followingvariables:

-   -   1. A variable containing the current National Best Bid and Offer        (NBBO) and another for last NBBO for the symbol.    -   2. A variable to hold the last trade price for the symbol.    -   3. A variable to hold the last message time for the symbol.    -   4. A variable containing a list of completed orders that have        accrued credits waiting to be written to an output file.    -   5. Boolean value stating whether the symbol is open to        calculating credits.

Once the Symbol Processor objects are allocated and initiated for eachsymbol, processing is ready to begin. In a preferred embodiment, theplug-in only subscribes to certain transactions. The transactions arethe following:

1. Order Status: This message contains the status of the order.

2. National BBO: Contains all information regarding the state of theNBBO.

3. External Trade: Contains data on the last sale of the stock.

4. Symbol Status: Contains market state messages.

Upon receipt of a message, the system according to the preferredembodiment checks to see if it is one of the above listed message typesand it also checks the symbol. Another hash table is indexed by symbol,which maps the symbol to the appropriate Symbol Processor object. TheSymbol Processor object contains five public functions, which aredescribed below:

Process Symbol Status

This function is used by a Symbol Processor object to set the Booleanvalue “isOpen” to true or false depending on the symbol status. Creditswill not increment unless this value is set to true. The “isOpen” valueis set to false by default and only changes to true when an “Open”symbol status message is received. Once open, the symbol will accumulatecredits until an “Ops Halted”, “Market Halted”, or a “Closed” message isreceived. No further credits will be awarded until the symbol isre-opened. The timer for adding credits will reset to zero when thesymbol is re-opened.

Process National Best Bid Offer

This function sets the last NBBO value to the current NBBO value andcurrent NBBO value is then set to the latest value. The Symbol Processorobject keeps track of both the most recent and previous NBBO in order toadd credits based on elapsed time between received messages. This willbe discussed in the section “Adding Credits.”

Process Order Status

This function processes all order status messages including New,Replaced, Admin Canceled, System Cancelled, User Cancelled, Filled,Partial Filled, Rejected, Shares Locked and Shares Unlocked. When anOrder Status message is passed to a Symbol Processor object, an instanceof the Order class is created and processed according to the status itcontains. Two hash tables in the Symbol Processor object, “current bidorders” and “current ask orders”, store active orders by price and ordernumber. An order can be added, deleted, updated, moved to a new price,and credited while stored in one of the tables. When an order iscompletely filled, cancelled, or the symbol is closed, it will beremoved from the active orders table; if the order earned credits, thecredits will be added to a list of output strings, which will be storedafter processing is complete. The detailed handling of each status islisted below:

-   -   New: The Symbol Processor first checks to see if the order        should be added to the current bid orders or current ask orders        hash tables indexed by order price. If the order's price does        not yet exist on the hash table, it will be added with an        instance of the custom class Orders as the value of the hash        table. The order will then be added to secondary hash table        contained within the Orders class by order number. According to        one embodiment double hashing allows the system to locate a        particular order for further status updates to the order        efficiently. For sell short and pegged orders, the price is        calculated before adding the order to either hash table.    -   Partial Filled Shares Locked, and Shares Unlocked: When an order        is added to either the current bid orders or the current ask        orders hash table, the Symbol Processor keeps track the price to        index for the order. When a Partial Filled, Shares Locked, or        Shares Unlocked message is received, the Symbol Processor looks        up the order using price as the hash index and updates the        quantity on the order.    -   Filled, Admin Canceled, System Cancelled, User Cancelled: These        statuses alert the Symbol Processor to remove a particular order        from the bid or ask hash tables and stores credits earned, if        any, to a list of output strings that will be written to a file        at the end of processing.    -   Replaced: When this message is received multiple events occur.        First the existing order is removed from the current orders        table and if credits have accrued for the order then they will        be stored in the list of output strings. Then a new order is        added at the current order price.    -   Rejected: When this status is received, the order is removed        from the current orders hash table and discarded without storing        any credit information.        Process Pegged Adjusted NBBO

This function updates the price for Pegged Orders, whose value is set tothe pegged adjusted NBBO. Pegged Orders are limit orders to buy or sella stated amount of a security at a displayed price set to track thecurrent bid or ask of the NBBO. The tracking of the relevantConsolidated Quote information for Pegged Orders will occur on areal-time basis. A Pegged Order may be designated as a DiscretionaryOrder, which means that it includes an un-displayed price as well as adisplayed price. The displayed price of a Pegged Order designated as aDiscretionary Order will be used to reflect changes in the NBBO. Thediscretionary price of a Pegged Order will re-price based on thecorresponding change in the displayed price, for example, by calculatinga price a fixed offset from the displayed price. If the calculated pricefor the Pegged Order would exceed its limit price, it will no longertrack and will remain displayed at its limit price.

Throughout the life of a Pegged Order, the Symbol Processor keeps trackof Pegged Orders using the price as the hash index, and under thoseprices the Orders class keeps track of the Pegged Orders. After thepegged adjusted NBBO is updated, the processor will look at the list ofpegged order prices and call a separate function from the Orders classto return all of the Pegged Orders under that price. Since the Ordersclass keeps tabs on what orders are pegged, it retrieves each PeggedOrder by order number and returns a list of orders to the processor.When the Symbol Processor has retrieved all of the Pegged Orders fromthe current orders tables, it loops through them, recalculates theirprices, and adds them back to the current orders table at the new price.Pegged Order prices are based on the Bid\Ask of the pegged adjusted NBBOplus or minus the offset given on the order.

Adding Credits

Before a Symbol Processor handles a new message corresponding to aparticular symbol, it compares the timestamp of the new message with thetimestamp of the last message received for that symbol. If the timestring has changed (HH:MM:SS), the On Time Change function is called tocheck if credits have been earned. This method subtracts the old messagetime from the new message time to calculated elapsed seconds betweenmessages. According to one embodiment, if the difference in the timestring is greater than one whole second, credit is calculated for theorder. For all messages other than NBBO, the Symbol Processor will takethe current NBBO's bid and ask values and add credits to all orderssitting under these prices for a second or more in the current bidorders and current ask orders hash tables. Credits are assigned to aspecific order by the following formula:QC=price*qty*elapsed secondsIn this formula “qty” is calculated by an algorithm that subtracts thequantity of the quote that is locked from the displayed quantity:

if displayed qty >0 (  if last shares − locked qty < displayed qty   last shares − locked qty    else    displayed qty − locked qty ) elselast shares − locked qty

Orders continue receiving credits in this manner until the order iscancelled, filled, or the symbol is closed for the day. When one ofthese final states occurs, the symbol processor will verify that theorder has been on the books greater than the configured minimum time(one second default), and if so, the credits will be stored to bewritten to the output file.

FIG. 1 illustrates the main processing loop used by a system accordingto a preferred embodiment of the invention. At step 100 a plug-in to anMDR retrieves a message from a set of stored messages collected oversome period of time, for example, a trading day. At step 102 the systemdetermines if there is another stored message. If no more messages areavailable, the system ends the process at step 104. If a next message isavailable at step 106 the system looks up the symbol object for thissymbol and if none exists, a new symbol object is created. At step 107the system calculates any revenue data credit that should be applied tothe order corresponding to the message. FIG. 2 show an example of howcredit may be calculated according to an embodiment of the invention aswill be discussed below.

At step 110 the system determines if the message is a symbol statusmessage. If it is a symbol status message, at step 112 the system startsto increment credits for the symbol if the symbol is open and stopsincrementing credits if the symbol is closed, for example, becausetrading in the symbol is halted. Also, if the message is a symbol statusmessage, the system returns to step 102 and looks for the next message.

If at step 110 the system determines that the message is not a symbolstatus message, at step 114 the system determines if the messageindicates this is a new order. If so, an Order object is created at step116 and processing returns to step 102 to look for a new message. If themessage does not indicate a new order, at step 118 the system checks tosee if the message indicates that the order has been filled or partiallyfilled. If so, at step 120 the system updates the quantity of the orderin the Order object and returns to step 102 to look for a next message.If the message is not a fill message, at step 122 the system determinesif the message indicates that the order is being replaced, for example,with an order at a new size or price. If so, at step 124 the systemstores any credits that have accrued for the order being replaced andcreates a new Order object to hold the new order. If not, at step 126the system determines if the order is being rejected. If so, at step 128the Order object holding the order is removed and no credit is awardedto the order.

If the order has not been rejected at step 126, at step 130 the systemdetermines if the NBBO has changed since the previous message wasprocessed. If so, the value for the NBBO in the Order object is updatedat step 132 to reflect the new NBBO values. If the NBBO has not changed,at step 134, the system determines whether the pegged adjusted NBBO haschanged. If so, at step 136, all Pegged Orders for the symbol areretrieved and their prices are adjusted to reflect the new peggedadjusted NBBO. If at step 134 it is determined that the pegged adjustedNBBO has not changed, the system returns to step 102 and the nextmessage is processed.

FIG. 2 shows how credit for an order is calculated according to anembodiment of the invention at step 107 discussed above. At step 200 thetimestamp on the message is read and the seconds field is parsed todetermine only the whole second. This value is compared with theprevious whole second for the previous message corresponding to theorder. At step 202 the elapsed number of whole seconds since theprevious message pertaining to the order is determined. At step 204 thesystem determines if the order has been at the NBBO price for one secondor more. If not, no credit is accrued to the order and the systemreturns to the process shown in FIG. 1 at step 206. If the order hasbeen priced at the NBBO for at least one second, at step 208 the systemcalculates a market data revenue credit for the order by multiplying theprice of the order by the quantity by the time in whole seconds theorder has been at the NBBO. That credit is added to any credit that haspreviously been accumulated for the order. Of course other formulas fordetermining credit for the order can be used within the scope of thepresent invention. For example, a weighting function could be used thatprovides proportionally more credit for larger orders or that providesmore credit for the first second the order is at the NBBO and lesscredit for subsequent second to reward market makers that placemarketable quotes for active stocks.

FIGS. 3 a and 3 b show timelines where exemplary messages relating to anorder for IBM and for Microsoft (MSFT) are processed by the system shownin FIGS. 1 and 2. In FIG. 3 a, at time 0.00 seconds a National NBBOmessage with the NBBO for IBM at 10.01×10.05 is received from the MDR.As shown in FIG. 1, at step 106, if no Symbol object for IBM exists, oneis created. No credit is calculated at step 108 because an order has notbeen received and processing passes to step 130 and 132 where the NBBOis updated to reflect 10.01×10.05.

At 1.5 seconds, as shown in FIG. 3 a, a New status message indicating anorder to buy 1000 shares of IBM at 10.01 is received. The systemproceeds through steps 102, 106, and 108 in FIG. 1 then to the steps inFIG. 2 where the system determines that this order has not been existentfor the minimum one second. At step 110 in FIG. 1 the system determinesthat this is an order status message and not a symbol status message. Atstep 114 and 116 an Order object is created for this order.

At 3.8 seconds a Filled status message for this order is received asshown in FIG. 3 a indicating that the entire 1000 shares were traded.The credit calculation process shown in FIG. 2 is performed at step 108in FIG. 1. At step 200 in FIG. 2 the timestamp from the Fill message isparsed and the seconds field yields a value of 3. The seconds field fromthe previous message is parsed to yield a value of 1. At step 202 theelapsed time that the order was at the NBBO is calculated as 2 secondsand at step 204 the system determines that the order has been at theNBBO for that period of time. Credit is calculated in step 209 as10.01×1000 shares×2 seconds=20,020.

FIG. 3 b shows another example where a Symbol Object is processedaccording to an embodiment of the invention. At 0.0 seconds an NBBOmessage is received indicating that the NBBO for MSFT is 30.55×30.65. Asshown in FIG. 1, at step 106, if no Symbol object for MSFT exists, oneis created. No credit is calculated at step 108 because an order has notbeen received and processing passes to step 130 and 132 where the NBBOis updated to reflect 30.55×30.65.

At 8.8 seconds, as shown in FIG. 3 b, a New status message indicating anorder to buy 5000 shares of MSFT at 30.55 is received. The systemproceeds through steps 102, 106, and 108 in FIG. 1 then to the steps inFIG. 2 where the system determines that this order has not been existentfor the minimum one second. At step 110 in FIG. 1 the system determinesthat this is an order status message and not a symbol status message. Atstep 114 and 116 an Order object is created for this order.

At 8.9 seconds a Filled status message for this order is received asshown in FIG. 3 b indicating that the entire 5000 shares were traded.The credit calculation process shown in FIG. 2 is performed at step 108in FIG. 1. At step 200 in FIG. 2 the timestamp from the Fill message isparsed and the seconds field yields a value of 8. The seconds field fromthe previous message is parsed to yield a value of 8. At step 202 theelapsed time that the order was at the NBBO is calculated as 0 secondsand at step 204 the system determines that the order has not been at theNBBO for the minimum one second. No credit is allocated to the order.

The above embodiments are illustrative of the present invention. Also,the terminology used herein is for the purpose of description and not oflimitation. It is to be understood that the invention is not intended tobe limited by this disclosure or particular arrangements shown, butrather is intended to cover various modifications and equivalentarrangements included within the spirit and scope of the invention, aswill be apparent to a person of ordinary skill in the art.

1. A method for a Self Regulated Organization to calculate and attributequote share credits to its members comprising the steps of: a. storingon a computer readable medium by a processor executing processinginstructions inputted trading data for a trading day , the trading dataincluding a plurality of messages corresponding to at least onedisplayed order; b. dividing the trading day into one-second intervalsby the processor executing processing instructions ; c. retrieving fromthe computer readable medium the trading data by the processor executingprocessing instructions; d. determining from the plurality of messagesthat the displayed order was displayed and available to trade for onefull second or more at a beginning of one or more one-second interval bythe processor executing processing instructions, wherein a price of saiddisplayed order is equal to the price of the NBBO, and wherein saidorder does not lock or cross a market; e. calculating quote credits ofsaid determined displayed order by multiplying the price times thequantity of said displayed order at each interval by the processorexecuting processing instructions; and f. storing said quote credits bydate, member, and symbol on the computer readable medium by theprocessor executing processing instructions.
 2. A computerized systemfor attributing quote share credits for a Self Regulated Organizationcomprising: a first memory; input trading data for a trading day storedin the first memory, wherein the input trading data includes a pluralityof messages corresponding to at least one displayed order; a processorconnected to the first memory; a first algorithm operable by theprocessor for dividing, trading day into one-second intervals and fordetermining that the displayed order was displayed and available totrade for one full second or more at a beginning of one or more of theone-second intervals at a price equal to an NBBO price and that thedisplayed order does not cross or lock a market; and, a second algorithmoperable by the processor for calculating quote credits for theidentified displayed order by multiplying the price times the quantityof the order at each one-second interval and for storing the calculatedquote credits in the first memory.